LIVING OFF DIVIDENDS & PASSIVE INCOME

According to a recent report from Bloomberg, Northwestern Mutual Life Insurance Co., the third-largest U.S. life insurer, has been buying gold. This is the first time in its 152-year history that Northwestern has purchased gold.

According to Northwestern CEO Edward Zore, “Gold just seems to make sense; it’s a store of value. In the Depression, gold did very, very well.”

According to Bloomberg, Northwestern has accumulated about $400 million in gold. CEO Zore believes that the price of gold could double “or even rise fivefold” if the economy continues to weaken. “The downside risk is limited, but the upside is large,” Zore said. “We have stocks in our portfolio that lost 95%.” But gold “is not going down to $90.”

Despite the rise in “cash for gold” TV ads and billboards, people are still generally skeptical about buying gold as an investment or hedge against inflation. As I’ve said before, I think gold will be the next bubble as people eventually lose confidence in the dollar and US governments ability to repay its debt.

I’m a fan of Jim Rogers. He wrote a book ten years predicting a run in commodities. He also wrote one of my favorite books, Adventure Capitalist, a fascinating story of his journey around the world where he talks about the macro-economy of each place he visits.

Here’s a recent video on Bloomberg. He thinks US stocks suck and the US Bond market is the last bubble left and mentions TBT. Here’s my post on my short bond trade. There may even be a currency crisis in the US and other countries. I still think its a good time to buy gold!

Last week, an 1804 Adams-Carter Silver dollar sold at auction for a whopping $2.3 million.  That’s a pretty good amount for  1 ounce of silver worth about $12! There are only 15 such coins known to exist and they’re quite popular.

The buyer was New Jersey dealer John Albanese, who said that the price was “basically a half-million down from last year because of the recession. It was a good opportunity. These don’t come around all the time.” The coin, the finest Class III 1804 dollar outside museums and available to collectors, had been expected to fetch $2 million.

The varieties of 1804 silver dollars are known as Class I, Class II, and Class III. The Class I pieces are sometimes called Originals, although that name is inaccurate, since they were struck in 1834 rather than 1804. The Class II and Class III pieces are sometimes called Restrikes, also an inaccurate name since there were technically no Originals.

Today’s guest post comes from Bruce, CEO of Superior Gold.

Last year I wrote an article for Living Off Dividends & Passive Income outlining 10 reasons why gold would break $1000. It was a conservative estimate at the time, which was achieved later in the year. Since then the Dow has touched 6400 points, many major U.S. banks have collapsed and the U.S. economy is searching for sound footing during a recession that may or may not be half way completed.

At the time of my article Gold was around $880 and some good people at LivingOffDividends.com made it seem as though I was predicting an imminent U.S. led invasion of China.

The president of Superior Gold Group thinks I should buy gold? Shocker.

- The Writer’s Coin

Alan Greenspan (Federal Reserve), Jim Cramer (Stock) and Ron Paul (Congressmen) have all recently recommended gold for diversity and protection.

The first question you’re probably asking is whether gold is a good investment to begin with. Take a look at the performance of gold prices over the past 5 years versus the stock market.

As you can see, gold is up over 100% while the Dow Jones Industrial Index is down over 20% for the same period. Of course, the best time to buy gold was few years ago, but its still not too late. The Federal Reserve is doing its best to devalue the US Dollar (buying $300 Billion in US Treasuries will do that) and gold prices should continue to rise.

So how does one invest in gold?

It isn’t difficult and there are 3 main ways:

May be I’ve been posting too much doom and gloom in the recent past. Do I really think we’re on the cusp of a global financial meltdown? No, I do not. But Telegraph does. Here’s an excerpt from an article which says the meltdown has already started:

If mishandled by the world policy establishment, this debacle is big enough to shatter the fragile banking systems of Western Europe and set off round two of our financial Götterdämmerung.

Austria’s finance minister Josef Pröll made frantic efforts last week to put together a €150bn rescue for the ex-Soviet bloc. Well he might. His banks have lent €230bn to the region, equal to 70pc of Austria’s GDP.

“A failure rate of 10pc would lead to the collapse of the Austrian financial sector,” reported Der Standard in Vienna. Unfortunately, that is about to happen.

Looks like I’m not alone in my enthusiasm for gold. For the first time ever, annual demand for gold exceeded $100 billion! According to the WSJ:

Demand for gold surpassed $100 billion last year for the first time ever, amid increased industrial and jewelry consumption and investors’ purchase of the metal as a safe haven, the World Gold Council reported Wednesday.

Gold demand — including jewelry consumption, industrial demand and identifiable investments such as bars, gold coins and gold exchange-traded funds — hit $102 billion in 2008, up 29% from a year ago.

In tonnage terms, gold demand rose 4% to 3,659 tons, the WGC said. Gold holdings in SPDR Gold Shares, the largest gold exchange-traded fund, rose to 1,008.80 tons Tuesday, surpassing the 1,000 ton level for the first time, according to the latest data from the fund. The total was up more than 200 tons from a month ago.

In the previous post on Peter Schiff, some of the commenters suggested diversifying out of the US dollar and economy and instead investing in natural resource rich countries like Canada and Australia. One person who supports this theory is Marc Faber. He thinks there’s a strong possibility that the US might see 200% inflation. Right now he says its reversible “in theory”, but he’s confident that we’ll follow Zimbabwe down the road of Mugabe economics and devaluation of the dollar (which will be bullish for gold!).

“In the US, we have a totally new school, and it’s called the Zimbabwe school. And it’s founded by one of the great leaders of this world, Mr Robert Mugabe, that has managed to totally impoverish his own country. And that is the monetary policy the US is pursuing.”

Faber also thinks that US government bonds should have junk bond status!

Here’s an excellent video starring Peter Schiff.  He predicts that the US Dollar will be the next bubble to burst. As a corrollary, I think gold will be the next bubble. The dollar collapse seems unlikely, you say? Well he did predict the collapse of the housing market 4 years ago and was met with wide-spread ridicule.

Like I’ve been saying for ages, make sure you buy some gold coins.  Silver coins aren’t bad either.

Today’s post is an excerpt from What If Stocks Were Priced In Gold? posted at Experience Is Everything.  While the post is incredibly interesting it is rather long. The portion I’ve quoted explains why gold will likely outperform the dollar and stocks over the next few years. It follows that you should invest in gold. Even though, I’ve been recommending gold since it was at $495/oz back in December 2005, it’s still not too late.  If the below mentioned scenario comes true, you’ll be happy you did!

Over a year ago, I wrote about China threatening to stop buying US Treasuries.

According to an article in the New York Times, it now looks like China is losing it’s appetite for US debt :

In the last five years, China has spent as much as one-seventh of its entire economic output buying foreign debt, mostly American. In September, it surpassed Japan as the largest overseas holder of Treasuries.

But now Beijing is seeking to pay for its own $600 billion stimulus – just as tax revenue is falling sharply as the Chinese economy slows. Regulators have ordered banks to lend more money to small and medium-size enterprises, many of which are struggling with lower exports, and to local governments to build new roads and other projects.

The media has been going on and on about deflation. Long-term bond prices have also been trending up and long term yields have been dropping, which means that the market thinks there will be long-term deflation. Even the Consumer Price Index numbers that came out claim that inflation is under 2% annually!

(Of course, if you’re one of the unlucky 533,000 people who lost their jobs last month, you really couldn’t care less about deflation).

Let’s first look at the Government reported numbers.

Now that the Federal Reserve has bailed out Citigroup, it’s back to business as usual. Having personally helped destabilize the world financial markets, they’re now predicting a rise in gold prices to $2,000/oz in 2009.

According to an article in the UK Telegraph:

Gold is poised for a dramatic surge and could blast through $2,000 an ounce by the end of next year as central banks flood the world’s monetary system with liquidity, according to an internal client note from the US bank Citigroup.

The bank said the damage caused by the financial excesses of the last quarter century was forcing the world’s authorities to take steps that had never been tried before.

This gamble was likely to end in one of two extreme ways: with either a resurgence of inflation; or a downward spiral into depression, civil disorder, and possibly wars. Both outcomes will cause a rush for gold.

As a follow-up to my previous 2 posts on gold, here’s a news article about the Australian Perth Mint suspending orders for gold bullion until January. Apparently having it’s workers slog 7 days a week isn’t enough to meet demand!

FEARS of the unknown long-term effects from the global financial crisis have sparked a new gold rush.

With retail and wholesale clients around the world stocking up on the precious metal, the Perth Mint has been forced to suspend orders.

As the World Gold Council reported that the dollar demand for gold reached a quarterly record of $US32 billion ($50.73 billion) in the third quarter, industry insiders said the race to secure physical gold had reached an intensity that had never been witnessed before.

Perth Mint sales and marketing director Ron Currie said the unprecedented demand had forced the Mint to cease orders until January, with staff working seven days a week, 24-hour days, over three shifts to meet orders.

Gold and silver are global commodities with spot prices being the same all over the world (assuming you live in an open society). The only differences are the premiums that dealers charge buyers. One of the surprising things has been the large increase in premiums on gold and silver coins. Even though the prices for both metals have dropped from their highs, the cost of buying gold or silver coins hasn’t dropped proportionately. In fact, there’s been reported shortages of these coins by the US Mint and the Australian Perth Mint, not to mention individual retailers. This seems to defy common wisdom; prices drop when demand decreases. Even though spot prices have increased, the demand seems to have increased and thus gold and silver coins aren’t as cheap as they should be.

I’ve been an avid collector of gold and silver coins and have been following the prices for a years.

Gold is supposed to have a negative correlation with the stock market. This year has proved otherwise. Of course, as we’ve seen repeatedly in the past, all asset classes correlate to the downside.

Gold which peaked at $1030/oz earlier this year, has been trading in the $700 range for a few months. There has been a flight to safety, which for most people means buying US Treasuries. Indeed, the flight has been so large that it has pushed the yields down to absurdly low levels. The yield on the 3-month Treasury was almost zero at 0.4% and the 10 year is 3.52%. (The yield on the S&P500 was 3.55% this week, higher than the 10 year Treasuries rate for the first time since 1958).

Last Friday, gold dropped to $680/ounce before rebounding to $740/ounce. Like every other asset, gold has been hammered this year. However, this may be partially due to a strengthening of the dollar. In terms of other currencies, it’s still close to its all time highs.

I think this is a good time to buy some gold if you don’t already own some. (and if you do, then it’s a good time to add more!). People often ask what’s the best way to invest in gold.

I tell them to buy a little bit of everything. Here’s an excerpt of an email I got recently.

“I believe the gold juniors offer the best value for your paper dollar going forward,” says Ed Bugos of the violently beaten-down junior mining sector. The Canadian Venture Index, the bellwether of juniors, is down a nauseating 70% from its 2007 high.

China just released a 10 Kilo Gold Coin to commemorate the 2008 Olympics that are currently being held in Beijing. 10 kilos of .9999 Fine gold is a staggering 321 ounces, more than 22 pounds and its more than a half foot in diameter! Not only is it the largest gold coin, it’s the rarest as well: Only 29 have been struck for the entire world and all have been sold.

This spectacular museum piece is housed in an exotic African Blackwood presentation case, which is crowned with a 35 pound carved stone dragon. The coin is legal tender with a face value of 100,000 Yuan and is Proof struck, which means it has an ultra-high relief, frosted design set against a flawless mirror background.

Regular readers know I’ve been pretty pessimistic on the outlook of the US economy and bearish on the US dollar as well. However, since it seems like everyone is echoing the same sentiment, could it be that we’re due for a short (or medium) term spike in the US Dollar?

According to Lou Basenese, editor of the The Alpha Intelligence Alert, think it’s time to go long the USD.
Here are some of the reasons he cites:

1. Bernanke & Paulson Rediscover “Verbal Intervention.” Treasury Secretary Henry Paulson and Fed Chairman Ben Bernanke finally got off their duffs to defend the dollar. Paulson got things started in Qatar on Sunday. Speaking to the leaders of the Gulf oil states, he urged the countries to think twice about abandoning their dollar peg, as “ending the peg is not the solution to the inflation problem.” And Bernanke stepped up today. Speaking, via satellite, to an international monetary conference in Spain he insisted Fed policy will be a key factor, “ensuring that the dollar remains a strong, stable currency.” After such a long silence, this week’s tag team approach is nothing but a positive development.

Not exactly fresh news, but its been reported that Dick Cheney, our beloved vice-president is betting against the US Dollar. He has tens of millions of dollars in foreign government bond and currency funds and international and emerging market stocks. His excuse is that it’s in a blind fund and he doesn’t know what his advisers invest in. That sounds like complete rubbish to me. I can’t imagine someone as intelligent as Dick Cheney not knowing what a huge chunk of his reported $95 million networth is invested in.

I’ve believed for sometime now that the government actually wants a weaker dollar and have been investing accordingly, but having the vice-president profit from it is a bit too unethical. The fact that he’s been profiting from the war in Iraq through no-bid contracts to Halliburton (in which he still retains a large amount of shares) is bad enough. If this had been China, he’d have been executed for bringing dishonor to his country!